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AIG Consol. Derivative Litig., C.A. No. 769-VCS (June 17, 2009) (Strine, V.C.)

June 17, 2009

In a case addressing to what extent derivative plaintiffs, suing on behalf of the corporation, may recover from the corporation’s alleged co-conspirators for the damage the corporation suffered due to its own illegal conduct, the Delaware Court of Chancery granted the third party defendants’ motion to dismiss, applying the doctrine of in pari delicto.

Plaintiffs instituted this derivative action on behalf of American International Group Inc. (“AIG”) to recover for the harm AIG allegedly suffered as a result of certain illegal activities. The complaint alleges that certain AIG officers and employees, led by AIG’s then CEO Maurice “Hank” Greenberg, engaged in multiple conspiracies with third-party defendants Marsh & McLennan Companies, ACE Limited and General Insurance Corporation (“Gen Re”), in an effort to overstate AIG’s financial position by billions of dollars. According to the complaint, AIG and Gen Re conspired to overstate AIG’s insurance reserves by issuing Gen Re a fake $5 million reinsurance policy. The complaint further asserts that AIG participated in a series of bid rigging schemes along with Marsh & McLennan, the world’s largest provider of insurance brokerage and consulting services, and ACE, whereby Marsh & McLennan would receive “contingent commissions” from AIG and ACE to either 1) issue inside information to one or the other regarding particular policy bids or 2) engage in sham auctions in which the winning bidder would be determined ahead of time with the other supposed bidders submitting plausible but out-of-the-running bids.

The Court of Chancery applied the doctrine of in pari delicto, which as a general rule, states that courts will not extend aid to either of the parties to a criminal act or listen to their complaints against each other but will leave them where their own act has placed them. Nevertheless, there are certain discrete circumstances in which the doctrine will not apply. These include instances where a plaintiff engaged in illegal acts under duress from co-conspirator defendants or where the suit involves important countervailing interests of public policy. The plaintiffs put forth four arguments as to why these limited exceptions should apply and not bar their claims against the third-party defendants from proceeding: 1) AIG, despite its size and sophistication, might have been forced into illegal conduct by Marsh & McLennan; 2) despite plaintiffs’ unambiguous allegations to the contrary in their complaint, it is possible that only mid-level AIG managers knew of the wrongdoing at issue; 3) some of the AIG fiduciaries who engaged in the illegal conduct might have stood to gain personally from their illegal conduct in addition to the gains of the company; and 4) AIG’s board and stockholders did not approve the illegal transactions. The Court quickly dismissed the first two arguments, instead finding the only reasonable interpretation of plaintiffs’ complaint to be for the opposite to be true — that AIG was a large and sophisticated actor fully capable of refusing to go along with the Marsh & McLennan bid-rigging schemes and that not only were the highest ranking AIG officers aware of the illegal activities, but, in the case of the Gen Re fake reinsurance program, actually instigated the illegal activity.

The Court interpreted plaintiffs’ third and fourth arguments as a joint appeal to the limited public policy exception to the in pari delicto doctrine, that where the stockholders themselves did not act wrongfully, the traditional rule would be unjust and that the stockholders should be permitted to protect their economic interests in the corporation. The Court, however, disagreed, holding that allowing these exceptions to pass would essentially eviscerate the in pari delicto doctrine by dampening the incentive for legal compliance by corporations, allowing them instead to hold out hope that the costs of an exposed conspiracy might be shifted to their co-conspirators. Such an exception would also require the Court to go through an extensive and extremely complex economic and fault-finding inquiry concerning the extent to which each individual participant was at fault for the wrongs of the group. In the Court’s mind, stockholders are not without remedy in this situation as the derivative suit allows stockholders to seek relief from their corporation’s own faithless fiduciaries for the harm suffered by the corporation. Limiting a corporation’s potential relief within this boundary encourages the adoption and implementation of effective law compliance and monitoring programs and protects the judiciary from having to ensure the “fair and equitable” distribution of the gains and losses of concerted illegal activity.  The Court, therefore, dismissed the claims against third-party defendants Marsh & McLennan, ACE and Gen Re.

The full opinion is available here